The Concept: Bitcoin is the building block for an entirely new economy, one built for the digital realm. It’s a decentralized, open source, electronic cash system that uses peer to peer networking (P2P), marked with digital signatures in cryptographic to generate currency. Anyone in this P2P network can either act as the client or a server for other computers, participating in shared access to resources like files or digital currency.
Basics of Bitcoin/ Mining: Unlike the traditional money like Dollars that is managed by financial institutions like the Federal Reserve that issues currency, bitcoins are generated through a process called Mining. You can also think of Mining as computers trying to solve a complicated mathematical problem, so technically, you make money off your computer solving maths. The goal is to get a 64 digit number, if your computer can solve this mathematical problem, you become a proud owner of a new block of 25 bitcoins.
The reason they call it mining is that there is fixed number of bitcoins that can ever be mined in the system. There are only 21 million bitcoins that will ever be created in total. The good news is that we’ve only mined a fraction of all of these bitcoins in the world. Like any economy, you don’t want too much too fast, because then the value drops or so slow that the economy grounds to a halt. Although Bitcoin is designed to be a self-stabilizing economy, whether that’s really the case or not- is the real question. Especially, when Bitcoin holders time and again have been a victim of alleged hacking.
FBI, for starters, is one of the major stakeholders of this bitcoin power that now controls more than 144,000 bitcoins. These bitcoins fell into FBI’s lap after it seized a bitcoin address that consolidates much of the Silk Road (a darknet site where people could buy drugs and other illicit goods and services) bitcoins. FYI- Those 144,000 bitcoins are worth close to $100 million.
Others include investors who either made a recent investment and pawned it all over the digital currencies or were far-sighted visionaries who saw the growing potential of Bitcoin and invested a little sum back when the exchange value was immensely low and are now millionaires. The very first examples of both these categories are Winklevoss Twins (who sued Mark Zuckerberg claiming that Facebook was based on an idea they had) and investor/ entrepreneur Erik Finman are two of the first Bitcoin Billionaires in the world. The Harvard-educated twins who bought $11 million worth of Bitcoin in 2013, and Finman who bought $1,000 into Bitcoin when he was 14 years old in early December, the twins were declared the first Bitcoin billionaires.
In case, you’re wondering how did that happen. The primary reason lies in the volatile nature of Bitcoin which for better or worse is much more unpredictable than other assets of investments like stocks or bonds. For instance, over the course of past one year, The price of Bitcoin has risen over 300% over the last year, Ethereum on the other hand, doubled 2000%. At the end of November 2017, Bitcoin's value reached $10,000 per unit. With over 16.7 million Bitcoin units in circulation, the cryptocurrency market capitalization ($167,156,585,840 as of Nov. 28, 2017) is actually higher than that of Disney, McDonald's or IBM, and it is slightly above that of GE. On the other hand, however, the value can also crash in no time, which is pretty common. In the spring of 2013, for instance, the market experienced a ghastly drop of nearly 71% when the price of bitcoin fell from $233 to $67—overnight!
But who created this revolution? Although the concept of cryptocurrency isn’t new, the anonymous force behind Bitcoin goes by the pseudonym, Satoshi Nakamoto. In 2008, Nakamoto published a “proof of concept” for Bitcoin. Although he left the project in 2010 and disappeared, other developers picked up his legacy. These developers are called “miners” - ones specializing in computing and hardware to process transactions. They secure the digital currency's network through a technology called Blockchain and collect bitcoin in exchange for their services. The blockchain is the technology securing these digital transactions is a continuously growing list of records, called blocks, that are chronologically lodged in a public digital ledger and are secured using cryptography.
Despite the cryptographic security embedded in Bitcoin, the digital currency, time and again, has been a victim of security theft and hacking. The largest loss of bitcoins ever recorded in the existing history was in early 2014 when Mark Karpeles, the CEO and majority stakeholder of Tokyo-based exchange Mt. Gox, suffered an alleged hacking of Bitcoins worth $460 million (in 2014 value). Although Mt. Gox was a messy combination of poor management, neglect, and raw inexperience, the incident does raise serious concerns about the security of the currency. Especially, when Bitcoin offers to give a bank account to anyone with a mobile phone, no ID required.
Now the answer to the question that’s been running on your mind all this time- How does one buy these digital currencies like Bitcoin? Exchanges allow people to buy and sell bitcoin. BitFlyer is the world's largest bitcoin exchange. Launched in 2014, by a former Goldman Sachs banker, Yuzo Kano, who is the founder and chief executive of BitFlyer. In 2017, the exchange witnessed cryptocurrency trades worth $250bn. BitFlyer is also working on its own blockchain called Miyabi with the involvement of the Japanese Bankers Association. Other exchanges include Bitfinex, Coinbase, Cryptsy, BTC-e, Kraken and several others that provide advanced trading tools like margin trading, short selling, and liquidity swaps to buy or sell Bitcoins, Litecoins, Darkcoins and several other forms of digital currency.
The next question that you can’t help asking is can you really spend bitcoin? Turns out you can or at least with some of the largest businesses including Overstock.com, Expedia, Newegg, Shopify stores, Roadway Moving Company, PizzaForCoins, Intuit PayByCoin Services, Microsoft, Reeds Jewelers, Inc., Gyft, CheapAir, and Dish.
Who are all buying Bitcoin? Surprisingly, Warren Buffett, one of the most famous investors in the world, isn’t a big fan of Bitcoin and believes it's basically a mirage and advice to “Stay away from it.” While other billionaires like Mark Cuban, although critical at first, now plan to invest around $20 million in companies developing blockchain technologies. Celebs like Gwyneth Paltrow (Actor and Goop founder ) Ashton Kutcher, Nas and Floyd Mayweather have all either invested in Bitcoin startups or advises Bitcoin wallets like Abra. Banks are embracing Bitcoin too. Fidelity Investments became one of the first financial institutions to embrace Bitcoin and other cryptocurrencies. The company allows its clients to use the Fidelity website to view their bitcoin holdings held through digital wallet provider Coinbase.
You may not know this but creating Bitcoin comes at an environmental cost. Bitcoin, created by the process called Mining done over computers consumes a lot of electricity: This adds a huge burden to energy systems across the globe, more so in countries like China, those systems still are powered by coal. According to the estimates by PowerCompare, a U.K.-based energy comparison tariff service, Bitcoin mining consumes more electricity than 159 countries, including Ireland and most countries in Africa.
While, the blockchain technology does have its own share of inevitable evils, whether as an environmental threat or an easy victim to cybercrime, cryptocurrency is undoubtedly an amazing and potentially world-changing technology. It’s changing the way we think about money, look at it and most importantly spend our money by offering us the first viable, decentralized, reliable form of digital cash. Cryptocurrencies like Bitcoin are emerging as a force that could democratize international finance. But it can also sink you in an instant if you don’t invest smartly. On the bright side, though the emerging wave of entrepreneurs investing in Bitcoin and financial institutions offering management of the crypto-currency, Bitcoin seems to be the biggest digital revolution after the genesis of dot.com.
Meenal currently works as a writer for Mobile App Daily. In the course of past five years, she's dabbled her way through Entertainment, Lifestyle, Automobiles only to find her one true love- technology. She uses all this information to help people she meets while traveling the globe. While a woman of few words, she can write blogs on anything endlessly.Follow